Mike Swanson discusses the continuing economic fallout from the coronavirus, focusing in particular on what are sometimes called “zombie companies.” These firms stay afloat largely because of easy money available at low interest rates, even though their business may be fundamentally unsound. Crucially, the government response to the coronavirus has continued to enable this behavior by bailing out firms that would otherwise go bankrupt. Swanson argues that in a healthy environment such firms should be allowed to go bankrupt—a vital feature of any market economy—as would huge sectors of American business that have been kept alive by decades of artificially low interest rates. Scott and Swanson worry about the powder keg created by years of unwise policy by the U.S. government, and about the spark that could be provided in the form of the coronavirus shutdowns.
Discussed on the show:
- “Here’s one more economic problem the government’s response to the virus has unleashed: Zombie firms” (The Washington Post)
- “The Age of Magic Money” (Foreign Affairs)
- Big Debt Crises
- David Stockman’s Contra Corner
Mike Swanson provides investment advice at wallstreetwindow.com and is the author of The War State: The Cold War Origins Of The Military-Industrial Complex And The Power Elite. He also works with the Neopolis Media Group, a group of historians, educators, authors, researchers, and free speech advocates who endeavor to provide original and engaging content, including The Ochelli Effect, and The Lone Gunman Podcast.
This episode of the Scott Horton Show is sponsored by: NoDev NoOps NoIT, by Hussein Badakhchani; The War State, by Mike Swanson; WallStreetWindow.com; Tom Woods’ Liberty Classroom; ExpandDesigns.com/Scott; Listen and Think Audio; TheBumperSticker.com; and LibertyStickers.com.
The following is an automatically generated transcript.
Scott Horton 0:10
All right, y’all welcome it’s Scott Horton Show. I am the director of the Libertarian Institute editorial director of antiwar.com, author of the book Fool’s Errand: Time to End the War in Afghanistan. And I’ve recorded more than 5000 interviews going back to 2003, all of which are available at ScottHorton.org. You can also sign up to the podcast feed. The full archive is also available at youtube.com/ScottHortonShow. Alright guys on the line I’ve got the great Mike Swanson while he wrote the war state, all about the Truman Eisenhower and Kennedy years there and the rise of the military industrial complex after World War Two. Have you read that man? It’s great. Oh yeah. Also, he’s a former hedge fund manager. Very successful guy on Wall Street and now he gives investment advice at Wall Street window calm. Yes, of course is a sponsor of this show, and has great stuff to say about money issues all the time. Welcome back. How are you doing, Mike?
Mike Swanson 1:14
Oh, I’m doing great. Scott, how are you?
Scott Horton 1:16
I’m doing okay. I’m a little bit worried about the future of the country, to be perfectly honest with you. I think when the washington post is talking, like Mark Thornton, that I should be really worried. And they did. I sent you this piece. I’m sure you probably saw it anyway. The Washington Post says, here’s one more economic problem. The government’s response to the virus has unleashed zombie firms. troubling rise in number of US companies that can’t make enough profit to cover debt payments. So obviously the thesis of the story here is the lockdown, among other things, the virus itself and other economic pressures and whatever have resulted in these massive bankruptcies. But importantly for this issue here is should be bankruptcies would be bankruptcies, but instead these companies are being kept afloat by artificial bank credit expansion. What do you know about that Mike Swanson?
Mike Swanson 2:25
Well, quite a bit, actually.
Scott Horton 2:31
Right now I’m listening.
Mike Swanson 2:32
Well, that does debating what how much I should say. But, okay, the article, it’s a good article. And, you know, I know we’re in a strange moment in the economy and everything we all feel it. In article points out that there’s all these companies Let me see the exact number here because it’s a massive one in five publicly traded US companies they claim as a zombie company, meaning that they have massive debts. And if they weren’t being helped, which the government is now doing, you know, not simply through these stimulus programs, but the Federal Reserve is buying corporate bonds, individual bonds, something that no other central bank has ever done. And these moves keep these companies alive in which if they weren’t happening, they would simply go bankrupt. And the argument in this Post article you sent me is that this can have long term economic costs, because what it’s doing is Miss allocating capital, you know, we’re keeping these zombie companies alive, maybe if they vanished, more efficient companies would take their place, or the money going to them could go to something better and you know, Similar arguments have been made more articulately than I can do by other guests you’ve had such as Bob Murphy in the past or david stockman and so forth. But I think that this is actually almost what the entire economy is at the moment. I mean, this says one out of five but firms, however, I don’t think this is just something happening is the result of the lockdowns and the economic situation we’re in, but is a legacy of the past decade at least, of the Federal Reserve keeping interest rates so low, it creates a bubble in the corporate bond market, of course, the treasury bond market to and when everything went down in March this year, stock market fell over 33%. The most alarming thing is that the bond market froze in essentially locked up in the Federal Reserve announced, oh, endless quantitative easing to prevent that from continuing and they succeeded in preventing the treasury bond market in the corporate bond market from completely collapsing. But the end result is I would suggest is where we are now, which this article is indicative, but I just want to one quick story when I said I know a lot about this. I am very lucky, because in 2008 when the stock market crashed, I made some money as shorting the market, but I didn’t know what to do. That’s it. 2010 11 and I took a large portion of my money and invested it in a real life business. It was a chain of body shops that me and a couple people got started. And I only had an interest in a few of them. And they grew though to almost 20 body shops regionally and last last year they got bought out by a private equity company that paid let’s say, twice what we pay were these people are my partners are paying for these stores. They would run you know, to a city or wherever and buy a body shop that’s already in business from someone who wants to retire. Give them let’s say, three to four times earnings, will we the chain got bought, bought twice that and then within a few months got flipped to an Another company that bought it paid even more. And that company most likely use debt to do all these purchases, and they’re a giant, private equity company. Now, I’ve been told that every single one of their businesses that they now own is losing money, because of, you know, the economy. But the point of this story is that over the past 10 years, these sort of private equity things have been going on all over the country. And the regular stocks you see in the stock market, they have also borrow, you know, massive amounts of money to buy back their stocks and debt is on their balance sheet. So all these problems of huge debt is why the bond market locked up in March in why now we I would say we have a zombie economy sitting in front of us
Scott Horton 7:58
well, and mean this is the thing right? All you Austrians been saying that, boy, we got a big bubble and it’s been 12 years and we’re due for a poppin. And then here comes the virus in the lockdown. Talk about popping a bubble. Now, I don’t know how deep of a depression we’re in. I think the numbers are something like 50 million people unemployed. And that’s according to the way they count him, which must undercount them. I mean, if you’re like hanging and kudos in orbit, and you’re looking down at the United States and our economy, and it’s medium term future here, what are you looking at? How bad is it really?
Mike Swanson 8:39
Well, this is, you know, yeah, I think. So, the official unemployment rate is I believe it’s 14.7%. That was the May unemployment rate. Now. Then, unemployment rate has a little anomaly In it in, in which they’ve doing something strange. There’s a segment of millions of people that they’re claiming are unemployed because they lost their job, then they got it back then they lost it again. And that adds 3% to it. I’m about so just to say it’s around 17%. And I have told people over the years, just friends, that if we ever get to 20% employment, that is when we would start to see protests and social turmoil. And obviously, we’re seeing that or have and when that started happening, I wouldn’t look back and thought, well, baby, by 20% ideas wrong. And actually, during the 1800s, there are several times where unemployment was over 13% and that was considered a depression. And there were, there was social turmoil. For example, In 1877, there’s a giant railroad strike. So 13% unemployment is enough to cause social stress not, you know, you don’t need to be over 20 or up to 30 or something. As far as what’s going to happen with the economy or we’re at when the market stock market was rallying sharply in April in May, there are a lot of people out there, claiming we were going to have a V shaped recovery, meaning that when the economy opened back up, everything would just boom and be back to normal essentially, I didn’t believe that was going to happen. Because I thought, these debt problems were going to just prevent it, basically, and also that the virus itself probably would cause enough people to remain cautious, but more The debt problem is my main concern. However, that seems to now be happening that the boom that we saw for a couple weeks on this reopening, it appears to be running out of steam already. One proxy I’m using is what’s going on in Las Vegas. In the casinos there opened up about six weeks ago and saw a lot of people return the first weekend driving from California and locals, and now they’re reporting in these casinos is that’s all dropped off not just this week. When the news is the virus is now creating more headlines but starting two or three weeks ago just dropped off. And a lot of these high roller people have not returned to the casinos. They’re evidently staying at home and saving their money or whatever they’re doing. And I just think that’s a metaphor for the hill economy. However, I don’t think that means we’re about to see an economic crash, because we already did in March and April, I don’t think, you know, we’re gonna get to 30% or 40% employment in the Federal Reserve itself, they’re claiming that by the end of the year, the economy will shrink 6.5% and then grow 5% next year, that would suggest that the economy’s kind of just gonna be like it is now for the foreseeable future, and we’re just gonna muddle around. I think that’s the most likely scenario. And that also kind of fits into the metaphor of zombie companies, you know, uses economy that just kind of moving around in the dark and not really booming but not getting dramatically worse than it already He is I think that’s really what the story is gonna be for maybe the next year.
Scott Horton 13:06
Or the next year, man. I thought you’re gonna say, yeah, you know, the rest of the decade?
Mike Swanson 13:13
Well, the big question is what happens after that? So there’s an article, I sent you a link to it in, it’s behind a firewall, but it’s in the current issue of Foreign Affairs, the tie in the articles the title of the age of magic money. And it’s, it’s advocating for all these Federal Reserve programs, and more government spending and stimulus. Look, the government spent 1.3 trillion in 2008, or the Fed did as the QE bailout, and I think Obama spent about a trillion in 2009. And now we’re talking multiples of that already that just this year, and the article claims Well, you know, Yeah, the problem would be if this causes the dollar to crash and people to worry about government spending and a debt crisis with the government debt. But that didn’t happen in 2008. It’s not happening now. So therefore, we’re in the age of magic money, and we just got to keep spending the money in the article even says we needed to take advantage of the movement to do more public investments, do things to soften inequality and so forth. But the, I’m not advocating for that. I’m just saying what they’re saying. But the remarkable thing about it is they make an argument at the end that no one can predict when we’ll be able to stop doing this. They say the future I’m reading it when the future is uncertain. It can ditch in contingent, a different kind of prediction seems safe. If inflation does break out, the choice of a handful of individuals are determined whether finance goes over the precipice. And they claim that in the past the Federal Reserve was able to hike interest rates to prevent interest inflation running out of control of Paul Volcker did it in Chester Martin under Harry Truman did it. So there’s seem to be saying we just can keep doing this.
Scott Horton 15:31
And what was the national debt when Paul Volcker did that half a trillion dollars?
Mike Swanson 15:35
Scott Horton 15:38
And the national debt now is, what 28 or something?
Mike Swanson 15:42
Scott Horton 15:45
in other words, if they raise interest rates like that, the national government would be bankrupt immediately because they wouldn’t be able to pay interest on the debt at all. Or they could just abolish the entire military and even that wouldn’t do it. Probably
Mike Swanson 15:59
not it’s This moment. So, I mean, I knew when I talked with you when this all started and I think it was our interview is in April cited this Ray Dalio book big debt crises and that’s the roadmap I think this is heading to and he study it’s like a reference book going through 100 of these things. And basically we
Scott Horton 16:23
say the name and the author again.
Mike Swanson 16:25
Oh, Ray Dalio D-A-I-L-O big debt crises in the show, not everybody. Yeah, the to make a long story short, basically, we’re probably gonna see the economy continued DAC like be like it is. And then when it does truly bottom out, and go up into a once we’re in a growth phase, it’s going to last now Just a simple bounce. That’s when the inflation would start, the dollar will probably go down, and so forth. And that would probably continue for several years. Basically, it’s and we’ve seen that sort of thing happen in other countries, most recently in Turkey over the past couple years. It happened in Russia twice. Russia had a crisis like that. I think in 2016, was basically, the bottom line is you have a lot of inflation for a couple years. Along with economic growth, the currency goes down, and that process inflates away. All these big debt loads as it plays out. And then the Fed can raise rates in, in, go back to, you know, to put us on a more normal path, sort of like the 1970s. That’s kind of what happened then, but this would be a more extreme version of that. But so in my my feeling is we’re in this strange stasis moment, culturally, politically and economically in with the financial markets this year and it’s just something we’re living through and it’s you know, it’s in the economy’s weird. I mean, there’s so many people without jobs, but yet at the same time they’re getting they have gotten stimulus Jacks that help them.
Scott Horton 18:32
Whether it’s 1200 bucks. I mean, that’s in and out. That’s not even half. That’s not even a month’s rent for a lot of people. You know, you can’t get a one bedroom apartment for 1200 bucks in Austin. So Well, yeah. I mean, I guess the $600 for some people getting the unemployment but that’s hardly everybody.
Mike Swanson 18:53
No, it isn’t. So, and I don’t have you know, I wish I had the article you sent me I read stuff like this. I wish I had a solution or
Scott Horton 19:03
so let me play the reserves advocate here. Okay for a second. I think that my community college teachers would have said that a man a soft landing is better than the hardest crash, you know wily coyote at the bottom of the cliff and trying to scrape yourself up from way that held down there is a lot harder. And so yes, this causes these dislocations. It’s almost like flattening the curve of the the peak of the crash, right? So okay, recovery will take longer, but we’re not going to go to the absolute depths of the worst depression. That’s what they would say.
Mike Swanson 19:43
Well, maybe unfortunate, unfortunately. At this point, I think they might be right. You know, but by doing by by having that mentality for since 19, let’s say 91 when they start bailing out Mexico, ACO and these couple other third world countries and then they in 98, they build out a hedge fund. And ever since, you know, they’ve done this over and over again, I would say if they hadn’t been doing this over and over again, we wouldn’t be where we are in an ethic in 2008, that argument was exaggerated, you know, they didn’t have to bail out all these banks, they could have let some of them go under and then let small regional banks that didn’t have these problems, replace them in some way. But now I think the argument may be cracked. And the The reason why is because that 2008 crisis was a wall street bank crisis. But they put all those bad, they put all those bad debts onto the Treasury balance sheet. So now it’s not simply You know, company corporations or banks with the big debts, but the US government itself and when the bond market locked up in March, the treasury bond market locked up. And now, you know, the bond market is destroyed as a rational investment. And I say that because if I go buy a 10 year treasury bond, right now, the yield I get is 0.68. I don’t even make a percent. I don’t make anything Why would I buy that? It’s completely crazy. And that’s rate is there because of what the Federal Reserve is doing. And you know, if they stopped doing that, it’ll probably would crash overnight everything the stock market, the bond market, everything, but the result is we don’t have a real Economics, you know, a free market system of any degree at all, when the Federal Reserve is doing things, you know, is made it so interest rates, not only are too low, but absolutely have no rational investment sense at all. They just don’t. So how do you invest in that environment? You just it’s very difficult to do so. And how do you have a free market economy when the government is bailing out companies at will, without telling you who they’re bailing out? And so, the Federal Reserve is buying debt. Yeah.
Scott Horton 22:47
You know, in our kind of all other things being equal here, we’re not just talking about a regular old crash. We’re talking about this government enforced lockdown that has just decimated certain many sectors of the economy that we’re only I guess, beginning to take the temperature all but I’ll tell you what, though, if, if you speak line graph, then david stockman articles where he reproduces all these charts from the Federal Reserve and so forth, will give you a nightmare Smith
Mike Swanson 25:00
Well, the thing about the economy and one of the reasons I mentioned this personal thing of having you being involved some body shops that got bought the private equity company that owns the now they own they’re one of the largest in the country and they own things such as Planet Fitness. Pabst Blue Ribbon, and I’ve been told, you know, that almost every single one of the companies they own is losing money. So, just, you know, I don’t The thing about the lockdowns in April or early May, I was speaking with someone locally that’s on the board of directors of one of the Bank of a local regional bank. And at the time, I thought the lockdowns would end in July or June. That’s what some of the health officials were saying and articles we’re kind of making a case for that Donald Trump, actually, in some of his first press conferences about this, hinted at that that the lockdowns might end to July and things would return to normal in August. And this person A friend of mine was basically telling me a bunch of stories that implied that they would have to end very soon because of the economic pressures that they were creating.
Scott Horton 26:32
Yeah, I mean, that was why I thought they wouldn’t last even through April or I mean, I thought they’d last through the end of April, I guess was the original chart to for the downside of the curve. And I thought, you know, look big business rules this country and I could see them accepting four weeks mandatory vacation for everybody okay, fine, but they’re not going to tolerate any more than that. And then I was wrong. They put up with a whole extra month in that so and to all of our detriment to obviously.
Mike Swanson 27:02
So if you, if the person, the listener doesn’t like lock downs, I would suggest no matter what happens with the virus, they won’t return. Again the way they did, were here at the start of them.
Scott Horton 27:14
Yep. Now, I said that all along to once you relax them once, you’re not ever gonna be able to do that, again, that was your one shot at it to build more hospital beds or get more ventilators or whatever it was that you need, but you’re not gonna be able to do that, again. It’s a big country 300 million people and if you ever flown on a plane from one end of it to another, or even better yet driven from one side of it to another one coast to the other. It was an empire even before the Spanish American War. It’s humongous. So there’s just it’s unenforceable. It’s just crazy to try without, you know, Chinese level totalitarianism, which we won’t accept. So
Mike Swanson 27:58
So here we are. Yeah.
Scott Horton 28:00
And things are looking bad right now. I mean cases are up up here in Texas. And I think, you know, in my county in my neighborhood, hopefully nothing more specific than that. But uh, anyway, well,
Mike Swanson 28:16
what I’ve been keeping an eye on is not the number of cases because they are doing more testing. So obviously there will be more cases in the data hospitalizations and you know, where I live in Virginia and it’s, we’re doing fine, I would say but North Carolina the hospitals, hospitalizations are going straight up. They’re doing it the same in South Carolina and Florida. And so it’s, it is but you wonder, Is this something that will just move, you know, instead of these big waves up and down and there were three of them, right and the Spanish Flu if instead this will just be like a rolling situation where say it dies out? Where you live in a few weeks and then it appears in Montana or somewhere you know? Yeah Who knows?
Scott Horton 29:07
Yeah, I was hoping that Texas sun would come and murder that so be by now but hadn’t yet but the Texas sun a murder an sob so why not a virus you know?
Mike Swanson 29:19
Scott Horton 29:21
it’s a it’s a thing to behold it’s one of the wonders of the world the Texas sun if that can protect us from a virus what can and I’m so sorry I’m I’m late we got to go Mike but thank you so much for your time again on the show man always great to talk to you.
Mike Swanson 29:35
You too are totally
Scott Horton 29:36
okay guys, check out the great Mike Swanson. He’s at Wall Street window.com WallStreetwindow.com and check out his great book, The War state. The Scott Horton show, Antiwar Radio can be heard on kpfk 90.7 FM in LA, APSradio.com antiwar.com ScottHorton.org and libertarianinstitute.org